Choosing the best legal structure• There are several choices of business structure for a start-up• Setting up a new business is a simple, straight-forward task• The trick is to choose a legal structure to minimise the risk of investment which is also appropriate for the business• The most important issue is whether the entrepreneur is personally liable for the debts of a start-up
Importance of limited liability• An important protection for shareholders in a company• Shareholders can only lose the value of their investment• However limited liability does not protect against: – Wrongful or fraudulent trading, or – When personal guarantees have been given by directors
Sole trader• The most common type of business structure• Very simple and cheap to set up• A sole trader is just an individual owning the business on his/her own• Remember that a sole trader can also employ people – but those employees don’t share in the ownership of the business• The sole trader owns all the business assets personally and is personally responsible for the business debts. A sole trader has unlimited liability• Unlimited liability not too much of an issue if the sole trader just deals in cash!
Sole trader + / -Advantages DisadvantagesQuick & easy to set up – the Full personal liability – “unlimitedbusiness can always be liability”transferred to a limited company Harder to raise finance – soleonce launched traders often have limited funds ofSimple to run – owner has their own and security againstcomplete control over decision- which to raise loansmaking The business is the owner – theMinimal paperwork business suffers if the owner becomes ill, loses interest etcEasy to close / shut down Pay more tax than a company
Limited company (1)• Limited companies are separate legal entities to the founders. A legal entity can own things itself (assets), can sue and be sued• Companies are owned by their shareholders and run by directors.• The shareholders appoint the directors (who in most cases are one and the same people!) who run the company in the interests of the shareholders• Shareholders own a share of the company, but they do not own the assets of the company and they are not liable for the debts of the company
Limited company (2)• The company owns the assets and pays the debts. If the company becomes insolvent (i.e. it cannot pay its debts), then the company is closed• Shareholders are not liable for any debts owed by the company that cannot be settled. That is the importance of limited liability
Limited company (3)• By far the most common form of limited company is a private limited company. Private means that the shares of the company are not traded publicly on a stock exchange• By contrast, a public limited company (“plc” after its name) tends to have a larger value of share capital invested and its shares may be traded publicly. It is rare for a start-up to be a plc
Limited Company + / -Advantages DisadvantagesLimited liability – protects the Greater admin costs shareholders (the big Public disclosure of companyadvantage) informationEasier to raise finance – both Directors’ legal dutiesthrough the sale of sharesand also easier to raise debtStable form of structure –business continues to existeven when shareholderschangeCan pay less tax